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        <li class="layui-this"><i class='fa fa-edit'></i> Statement of Cash Flows II</li>
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                <p>Dwayne Barker, president of Barker Electrical Contracting Inc. (an S Corporation), has just received the draft copy of the financial statements that were recently prepared for Barker by your accounting firm. The draft copy of the financial statements can be viewed under the Exhibits tab. He insists that there are major mistakes in the financial statements and that the company couldn't possibly have net income of over $1,000,000 since he has only a fraction of that amount in his checking account at any given time. A junior staff member of the firm has drafted a response to Mr. Barker that concentrates on an explanation of the statement of cash flows. You are to review the comments and correct the document before Bill Dryden, the engagement partner, meets with Mr. Barker to explain the situation.<br>
                    <br>
                    To revise the memo, click on each segment of underlined text below and select the needed correction, if any, from the list provided. If the underlined text is already correct in the context of the document, select [original text] from the list. If the underlined text should be deleted, select [Delete text] from the list.<br>
                    &nbsp;</p>

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                <p><br>
                    <strong><u>MEMO:</u></strong><br>
                    Date: &nbsp;February 28, Year 5<br>
                    To: &nbsp;Dwayne Barker<br>
                    From: &nbsp;Bill Dryden, Partner<br>
                    Re: &nbsp;Explanation of Statement of Cash Flows<br>
                    <br>
                    The net income of the company for Year 4 was $1,095,522. That income was determined using the accrual basis of accounting, in accordance with U.S. GAAP. The purpose of the statement of cash flows is to show the difference between accrual basis income and the cash generated by the business. </p>
                <span class="parent mbg {if condition='isset($log.1)'}xbg{/if}">{if condition='isset($log.1) && $log.1.topic_v eq 2'}<s>{/if}The cash basis income of the company for Year 4 is the net increase in cash of $159,742 reported in the statement of cash flows.{if condition='isset($log.1) && $log.1.topic_v eq 2'}</s>{/if}</span>
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                                <input type="radio" name="topic_t[1]" value="1" {if condition='isset($log.1) && $log.1.topic_v eq 1'}checked{/if} title="<em>[Original text]</em> <em class='span'>The cash basis income of the company for Year 4 is the net increase in cash of $159,742 reported in the statement of cash flows.</em>" ><br/>
                                <input type="radio" name="topic_t[1]" value="2" {if condition='isset($log.1) && $log.1.topic_v eq 2'}checked{/if} title="[Delete Text]"><br/>
                                <input type="radio" name="topic_t[1]" value="3" {if condition='isset($log.1) && $log.1.topic_v eq 3'}checked{/if} title="<em class='span'>The cash basis income of the company for Year 4 is the net cash provided by operating activities of $602,382.</em>" ><br/>
                                <input type="radio" name="topic_t[1]" value="4" {if condition='isset($log.1) && $log.1.topic_v eq 4'}checked{/if} title="<em class='span'>The cash basis income of the company for Year 4 is $1,043,981, which is the net income of the company less depreciation and amortization.</em>"><br/>
                                <input type="radio" name="topic_t[1]" value="5" {if condition='isset($log.1) && $log.1.topic_v eq 5'}checked{/if} title="<em class='span'>The cash basis income of the company is not shown on the statement of cash flows.</em>" ><br/>
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                Although your company's profitability was significantly higher in Year 4 than it was in Year 3, the cash generated was significantly less than the income of the company. One reason for this is the change in accounts receivable from Year 3 to Year 4. 
                <span class="parent mbg {if condition='isset($log.2)'}xbg{/if}">{if condition='isset($log.2) && $log.2.topic_v eq 2'}<s>{/if}A decrease in accounts receivable from $1,251,331 in Year 3 to $790,502 in Year 4 decreased cash flows from operations for the year.{if condition='isset($log.2) && $log.2.topic_v eq 2'}</s>{/if}</span>
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                                <input type="radio" name="topic_t[2]" value="1" {if condition='isset($log.2) && $log.2.topic_v eq 1'}checked{/if} title="<em>[Original text]</em> <em class='span'>A decrease in accounts receivable from $1,251,331 in Year 3 to $790,502 in Year 4 decreased cash flows from operations for the year.</em>" ><br/>
                                <input type="radio" name="topic_t[2]" value="2" {if condition='isset($log.2) && $log.2.topic_v eq 2'}checked{/if} title="[Delete Text]"><br/>
                                <input type="radio" name="topic_t[2]" value="3" {if condition='isset($log.2) && $log.2.topic_v eq 3'}checked{/if} title="<em class='span'>A decrease in accounts receivable from $1,251,331 in Year 3 to $790,502 in Year 4 increased cash flows from operations for the year.</em>" ><br/>
                                <input type="radio" name="topic_t[2]" value="4" {if condition='isset($log.2) && $log.2.topic_v eq 4'}checked{/if} title="<em class='span'>An increase in accounts receivable from $790,502 in Year 3 to $1,251,331 in Year 4 decreased cash flows from operations for the year.</em>"><br/>
                                <input type="radio" name="topic_t[2]" value="5" {if condition='isset($log.2) && $log.2.topic_v eq 5'}checked{/if} title="<em class='span'>An increase in accounts receivable from $790,502 in Year 3 to $1,251,331 in Year 4 increased cash flows from operations for the year.</em>" ><br/>
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                <br>
                The change in accounts payable from Year 3 to Year 4 also had an impact on cash flows. 
                <span class="parent mbg {if condition='isset($log.3)'}xbg{/if}">{if condition='isset($log.3) && $log.3.topic_v eq 2'}<s>{/if}A decrease in accounts payable from $138,164 in Year 3 to $72,898 in year 4 increased cash flows from operations for the year.{if condition='isset($log.3) && $log.3.topic_v eq 2'}</s>{/if}</span>
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                                <input type="radio" name="topic_t[3]" value="1" {if condition='isset($log.3) && $log.3.topic_v eq 1'}checked{/if} title="<em>[Original text]</em> <em class='span'>A decrease in accounts payable from $138,164 in Year 3 to $72,898 in year 4 increased cash flows from operations for the year.</em>" ><br/>
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                                <input type="radio" name="topic_t[3]" value="3" {if condition='isset($log.3) && $log.3.topic_v eq 3'}checked{/if} title="<em class='span'>A decrease in accounts payable from $138,164 in Year 3 to $72,898 in year 4 decreased cash flows from operations for the year.</em>" ><br/>
                                <input type="radio" name="topic_t[3]" value="4" {if condition='isset($log.3) && $log.3.topic_v eq 4'}checked{/if} title="<em class='span'>An increase in accounts payable from $72,898 in Year 3 to $138,164 in year 4 increased cash flows from operations for the year.</em>"><br/>
                                <input type="radio" name="topic_t[3]" value="5" {if condition='isset($log.3) && $log.3.topic_v eq 5'}checked{/if} title="<em class='span'>An increase in accounts payable from $72,898 in Year 3 to $138,164 in year 4 decreased cash flows from operations for the year.</em>" ><br/>
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                A significant amount of cash was spent replacing or improving the fixed assets of the company. 
                <span class="parent mbg {if condition='isset($log.4)'}xbg{/if}">{if condition='isset($log.4) && $log.4.topic_v eq 2'}<s>{/if}During Year 4, the company acquired fixed assets for $253,740 and sold fully depreciated fixed assets for $2,800.{if condition='isset($log.4) && $log.4.topic_v eq 2'}</s>{/if}</span>
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                                <input type="radio" name="topic_t[4]" value="1" {if condition='isset($log.4) && $log.4.topic_v eq 1'}checked{/if} title="<em>[Original text]</em> <em class='span'>During Year 4, the company acquired fixed assets for $253,740 and sold fully depreciated fixed assets for $2,800.</em>" ><br/>
                                <input type="radio" name="topic_t[4]" value="2" {if condition='isset($log.4) && $log.4.topic_v eq 2'}checked{/if} title="[Delete Text]"><br/>
                                <input type="radio" name="topic_t[4]" value="3" {if condition='isset($log.4) && $log.4.topic_v eq 3'}checked{/if} title="<em class='span'>During Year 4, the company acquired fixed assets for $193,613. The assets disposed of during the year had a book value of $2,800 at the time they were sold.</em>" ><br/>
                                <input type="radio" name="topic_t[4]" value="4" {if condition='isset($log.4) && $log.4.topic_v eq 4'}checked{/if} title="<em class='span'>During Year 4, the company acquired fixed assets for $193,613 and sold fully depreciated assets for $2,800.</em>"><br/>
                                <input type="radio" name="topic_t[4]" value="5" {if condition='isset($log.4) && $log.4.topic_v eq 5'}checked{/if} title="<em class='span'>During Year 4, the company acquired fixed assets for $253,740 and sold assets with a book value of $2,800 for $5,600.</em>" ><br/>
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                Another significant usage of cash was $315,000 of profit distributions made to the shareholders of the company, which we have presented in the financing section of your statement of cash flows. 
                <span class="parent mbg {if condition='isset($log.5)'}xbg{/if}">{if condition='isset($log.5) && $log.5.topic_v eq 2'}<s>{/if}Under U.S. GAAP, profit distribution can be presented as either an operating cash flow or a financing cash flow.{if condition='isset($log.5) && $log.5.topic_v eq 2'}</s>{/if}</span>
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                                <input type="radio" name="topic_t[5]" value="1" {if condition='isset($log.5) && $log.5.topic_v eq 1'}checked{/if} title="<em>[Original text]</em> <em class='span'>Under U.S. GAAP, profit distribution can be presented as either an operating cash flow or a financing cash flow.</em>" ><br/>
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                                <input type="radio" name="topic_t[5]" value="3" {if condition='isset($log.5) && $log.5.topic_v eq 3'}checked{/if} title="<em class='span'>Under U.S. GAAP, profit distribution can be presented as either an investing cash flow or a financing cash flow.</em>" ><br/>
                                <input type="radio" name="topic_t[5]" value="4" {if condition='isset($log.5) && $log.5.topic_v eq 4'}checked{/if} title="<em class='span'>Under U.S. GAAP, profit distribution can be presented as an operating cash flow, investing cash flow or financing cash flow.</em>"><br/>
                                <input type="radio" name="topic_t[5]" value="5" {if condition='isset($log.5) && $log.5.topic_v eq 5'}checked{/if} title="<em class='span'>Under U.S. GAAP, profit distribution must be presented as a financing cash flow.</em>" ><br/>
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                <span class="parent mbg {if condition='isset($log.6)'}xbg{/if}">{if condition='isset($log.6) && $log.6.topic_v eq 2'}<s>{/if}Finally, the net borrowings on long-term debt of $123,300 reduced your total cash available for the year.{if condition='isset($log.6) && $log.6.topic_v eq 2'}</s>{/if}</span>
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                                <input type="radio" name="topic_t[6]" value="1" {if condition='isset($log.6) && $log.6.topic_v eq 1'}checked{/if} title="<em>[Original text]</em> <em class='span'>Finally, the net borrowings on long-term debt of $123,300 reduced your total cash available for the year.</em>" ><br/>
                                <input type="radio" name="topic_t[6]" value="2" {if condition='isset($log.6) && $log.6.topic_v eq 2'}checked{/if} title="[Delete Text]"><br/>
                                <input type="radio" name="topic_t[6]" value="3" {if condition='isset($log.6) && $log.6.topic_v eq 3'}checked{/if} title="<em class='span'>Finally, the net borrowings on long-term debt of $93,834 reduced your total cash available for the year.</em>" ><br/>
                                <input type="radio" name="topic_t[6]" value="3" {if condition='isset($log.6) && $log.6.topic_v eq 4'}checked{/if} title="<em class='span'>Fortunately, the net borrowings on long-term debt of $123,300 offset your total cash outflow for the year.</em>" ><br/>
                                <input type="radio" name="topic_t[6]" value="4" {if condition='isset($log.6) && $log.6.topic_v eq 5'}checked{/if} title="<em class='span'>Fortunately, the net borrowings on long-term debt of $93,834 offset your total cash outflow for the year.</em>"><br/>
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                <br>
                I hope that this has helped to explain the cash position of the company. As always, we appreciate your business, and please feel free to call if you have any further questions.<br>
                <br>
                Sincerely,<br>
                <br>
                Bill Dryden<br>
                Partner<br>
                &nbsp;</p>

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                <p>&nbsp;</p>

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                    <strong>Pop-up 1: </strong><span style="color:#0000ff"><u>The cash basis income of the company is not shown on the statement of cash flows.</u></span><br>
                    The cash basis income of the company is not shown on the statement of cash flows. The purpose of the statement of cash flows is to provide information about a company's cash payments and cash receipts during the period. It classifies cash receipts and cash payments as operating, investing and financing activities and reconciles beginning and ending cash and cash equivalents for the period.<br>
                    <br>
                    <strong>Pop-up 2: </strong><span style="color:#0000ff"><u>An increase in accounts receivable from $790,502 in Year 3 to $1,251,331 in Year 4 decreased cash flows from operations for the year.</u></span><br>
                    An increase to a current asset account decreases operating cash flow for the year. The increase in accounts receivable during Year 4 represents sales made during the year for which cash was not yet collected at year-end.<br>
                    <br>
                    <strong>Pop-up 3: </strong><span style="color:#0000ff"><u>A decrease in accounts payable from $138,164 in Year 3 to $72,898 in year 4 decreased cash flows from operations for the year.</u></span><br>
                    A decrease in a current liability decreases operating cash flows of the year. The decrease in accounts payable in Year 4 represents an outflow of cash to pay down the liability.<br>
                    <br>
                    <strong>Pop-up 4: </strong><span style="color:#0000ff"><u>During Year 4, the company acquired fixed assets for $253,740 and sold fully depreciated fixed assets for $2,800.</u></span><br>
                    The company acquired $253,740 of fixed assets during the year. This is disclosed in the investing section of the statement of cash flows. Since the company received cash from the sale of property and equipment of $2,800 (disclosed in the investing section) and had a gain on sale of assets of $2,800 (disclosed in the operating section), the assets sold must have been fully depreciated.<br>
                    <br>
                    <strong>Pop-up 5: </strong><span style="color:#0000ff"><u>Under U.S. GAAP, profit distribution must be presented as a financing cash flow.</u></span><br>
                    Under IFRS, companies have the choice of presenting profit distribution (dividend payments) as either an operating cash outflow or a financing cash outflow. Under U.S. GAAP, profit distribution can only be presented as a financing cash outflow.<br>
                    &nbsp;<br>
                    <strong>Pop-up 6: </strong><span style="color:#0000ff"><u>Fortunately, the net borrowings on long-term debt of $123,300 offset your total cash outflow for the year.</u></span><br>
                    The statement of cash flows shows net borrowings of long-term debt of $123,300 ($150,272 borrowings less $26,972 payments). The net increase in long-term debt is a source of cash for the company. $93,834 is the increase in long-term debt less current maturities on the balance sheet. To calculate the total change in long-term debt using the balance sheet, the long-term debt less current maturities must be combined with the current portion of long-term debt.

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